Strict rules for overtime compensation clauses in employment contracts and works agreements

By Hagen Köckeritz, Ph.D., LL.M. oec. Int., and Janis Czemmel

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On a regular basis, German labor courts have had to decide on the enforceability of clauses in employment contracts that deem overtime hours as compensated within an employee’s regular remuneration. Nearly 10 years ago, the German Federal Labor Court (Bundesarbeitsgericht or BAG) reached a decision regarding contractual provisions of this kind in light of the law on general terms and conditions that had recently been modernized. At the time, the court provided guidance as to when such lump-sum compensation clauses may be admissible and which constraints otherwise need to be observed. A significant number of legal disputes in this area remain active to this day.

Lump-sum compensation clauses may still appear in more recent employment contracts — mostly in inadmissible formulations — because employers hope to spare themselves not only the cost of remuneration but also a considerable amount of organizational effort. Offering overtime compensation in addition to an employee’s regular remuneration requires diligent timekeeping. This is especially cumbersome in a world where employers and employees alike want working models to be agile and allow for a great deal of flexibility. Were it not for a potential general obligation to record all working time from beginning to end under the EU Working Time Directive (cf. European Court of Justice [ECJ] decision dated May 14, 2019, case number C-55/18), the common 9-to-5, clock-in-and-clock-out working model would be out of fashion.
Essentially, an employer has two different options for trying to implement lump-sum compensation for overtime work: Aside from the addition of a contractual clause to an employment agreement, a provision for lump-sum overtime compensation can be negotiated in a works agreement. In both cases, there are important matters to consider.

Lump-sum compensation clauses in employment contracts: general terms and conditions
Generally, clauses in employment contracts are considered to fall under the umbrella of general terms and conditions. Exceptions apply where clauses are individually negotiated between employer and employee, but this is rarely the case. Exceptions may apply to specific clauses regarding, for instance, reimbursement for relocation expenses or approval of certain side activities. Clauses regarding remuneration and working hours are, however, typically prepared and proposed by the employer without any input from the employee, which means clauses of this kind are typically viewed as general terms and conditions.
As a consequence of this classification, the respective clauses in employment agreements must comply with the law regarding general terms and conditions as set out in the German Civil Code (BGB). This law applies to all contracts between consumers and entrepreneurs, including employment contracts. Regarding compensation clauses for overtime work, section 307 (1), sentences 1 and 2, of the BGB are particularly relevant. According to this provision, general terms and conditions may be considered ineffective if they are too vague and/or unreasonably disadvantage the consumer. The BAG applies these abstract legal requirements in the case of compensation clauses as follows:

  • The contractual clause must be clearly understandable. Such clauses are permissible only if they indicate which services they cover and to what extent. Upon conclusion of the contract, the employee must be able to determine what he or she can expect and which services — in this case, maximum additional working hours — the employee must provide for the remuneration agreed on in the contract. The central requirement here is that the maximum number of overtime hours is sufficiently evident.
  • Care must also be taken to ensure that the general terms and conditions do not unreasonably disadvantage the consumer (that is, the employee). If the consumer is overburdened — particularly as regards compensation — this can lead to the clause being rendered invalid. In terms of a lump-sum compensation clause, the employer must not be able to unilaterally and substantially change the ratio of working time to remuneration in the employer’s favor. An example of an inappropriate disadvantage of this kind would be a compensation clause that deems all overtime as compensated within the scope of the employee’s regular compensation. In this case, there would be a considerable imbalance between the work for which the employer owes payment and the pay that would, in turn, render the clause invalid and unenforceable from the outset.

Compensation clauses in works agreements
In contrast with the one-sided clauses found in employment contracts, clauses in works agreements (Betriebsvereinbarungen) do not constitute general terms and conditions as they are negotiated between an employer and a works council on equal footing. The law addressing general terms and conditions does not apply to works agreements, nevertheless strict principles must also be observed in this case.
Very recently, a clause of this kind was the subject of legal proceedings before the BAG (decision dated June 26, 2019, case number 5 AZR 452/18). This case provides a good illustration of what must be taken into account when formulating overtime compensation clauses in a works agreement and what can lead to their invalidity. The works agreement in question contained a provision stating that certain employees, including the plaintiff, only needed to be monetarily compensated in the event of “regular overtime.” The plaintiff, however, demanded compensation in court for the overtime he had worked. In the end, the BAG ruled in the plaintiff’s favor. The court justified its decision as follows:

  • Clauses in works agreements must satisfy the requirement of certainty and clarity of standards. The contested works agreement, and in particular the term “regular overtime,” did not meet this requirement. For employees who fall within the scope of the works agreement, it was not clear what “regular overtime” meant. Interpretation of the clause in the context of further regulations within the works agreement did not bring additional clarity.
  • The overtime clause in the works agreement in question had another deficiency that ultimately contributed to its invalidity. It violated the principle of equal treatment under the German Works Constitution Act (Betriebsverfassungsgesetz). The BAG classified it as inadmissible that employees who “regularly worked overtime received lump-sum compensation for their overtime work, whereas their colleagues who only worked “irregular” overtime hours were compensated according to the actual number of overtime hours they had worked. One concern this approach had elicited was this: If no upper limit for overtime hours existed for each category, it would be possible to work more irregular overtime hours than regular overtime hours.

The BAG’s decision shows once more that very similar standards apply to works agreements and employment contracts in terms of certainty and transparency. A person affected by an overtime clause must be able to determine whether and to what extent he or she is entitled to overtime pay. In addition, clauses in works agreements must comply with the statutory principle of equal treatment pursuant to the German Works Constitution Act. Therefore, lump-sum compensation for overtime work determined by a works agreement does not by any means automatically provides greater legal certainty than overtime clauses in employment agreements.

Legal consequences of invalidity
The invalidity of clauses regarding lump-sum compensation for overtime work does not always result in additional payment obligations for the employer. The BAG has decided that certain groups of employees are not entitled to additional compensation for overtime. The decisive criteria here are primarily the amount of pay and the type of employment. For employees who are not considered “higher earners” and do not render “services of a higher kind,” there is a general assumption that, unless otherwise agreed, remuneration is to be calculated and paid according to the number of hours worked. Absent a proper clause regarding lump-sum overtime compensation, these employees may also demand remuneration for every additional hour of work performed. Although the BAG emphasizes that the distinction between a “higher earner” and a “normal earner” must always be determined on the basis of the circumstances of an individual case, the social contribution assessment ceiling (Beitragsbemessungsgrenze) of the German state retirement insurance is viewed as a good demarcation. Employees earning above the assessment ceiling are viewed as “higher earners,” whereas employees earning less are viewed as “normal earners.” The assessment ceiling is adjusted regularly; in 2020, it will be €82,800 for western Germany and €77,400 for eastern Germany. If an employee’s pay is above that limit, he or she can no longer objectively expect additional working time to be remunerated.

Admissible design
Inevitably, this question arises: What might an effective lump-sum compensation clause look like? In the interest of certainty and transparency, it is advisable to quantify the exact number of overtime hours deemed as compensated within the scope of an employee’s regular remuneration. In employment agreements, the number of overtime hours the employee is expected to work with no additional compensation cannot be set too high, otherwise it may risk representing an unreasonable disadvantage to the employee. As a rule of thumb, overtime hours equaling 10% to 25% of an employee’s regular weekly or monthly working time are acceptable. For employees at the lower end of the pay scale, the recommendation is to lean more toward 10%, whereas employees at the higher end of the pay scale (but still below the social contribution assessment ceiling) can be expected to work up to 25% more hours in addition to their regular weekly or monthly working time without extra overtime compensation. These amounts do not unreasonably disadvantage employees and can be clearly defined. If overtime compensation is governed by a works agreement, it may be wise to agree on a one specific percentage of working hours deemed as compensated within the scope of an employee’s regular remuneration. Otherwise, in light of the BAG’s recent decision (dated June 26, 2019, case number 5 AZR 452/18), courts could potentially view differentiation as a violation of the principle of equal treatment under the Works Constitution Act.

Summary and outlook
Though it is quite understandable that employers want to simplify handling overtime compensation, lump-sum compensation clauses are only suitable to a very limited extent, and, if inadequately formulated, they strongly risk not being enforceable. In this respect, the implementation of the latest ECJ case law on the measurement of working time (cf. ECJ decision dated May 14, 2019, case number C-55/18) also promises to give the issue new impetus. The general prognosis is that soon each employer will be obligated to fully record the working time (not only the overtime) of each employee in an appropriate manner. Even if exceptions remain permissible on the basis of the type and size of the company and the work performed, it is nevertheless expected that more employees will become aware of how many hours they actually work. This may fuel expectations for additional compensation, which, in turn, makes it very likely that many existing clauses regarding compensation for overtime work will be put to the test.

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